We are in the age when artificial intelligence is threatening to take over everything, from transport to medicine and from politics to economics.
While the technology is still in its nascent stages in most of these fields, it is making groundbreaking advancements in the financial industry.
Thanks to machine learning, a subfield of AI, computers can now think like a human financial advisor.
But can they replace them? A good number of industry analysts believe so, but others like me are not convinced.
While there is no doubt that machine learning and AI are revolutionizing the financial industry, it is doubtful that they will render human advisors jobless.
Instead, they are likely to create new roles and hence more opportunities for them.
This is already happening with most of the firms that had initially adopted a purely robotic or human approach turning to hybrid advisors.
A hybrid approach combines both the services of a human financial advisor and a robo-advisor.
For the record, robo-advisors are computer algorithms designed to follow specific rules to determine the investment preference of an investor and pick stocks for them based on this information. Unlike human advisors, robo-advisors can analyze huge chunks of data and make investment decisions within microseconds.
Machine learning makes it possible for these algorithms to learn from experience and improve with changing data to become more efficient and effective.
The key advantage of robo-advisors is they eliminate human emotions from investment, therefore, minimizing risk and maximizing returns.
While the robo-advisors may appear as the perfect solution to everything that is wrong with human advisors, there are several critical investment roles they can’t play. First, a purely robotic investment approach eliminates human touch which studies show to be crucial in the investment process.
A recent global investment survey by Legg Mason Asset Management shows that 60% of investors believe that human touch in investment is not only necessary but can never be replaced by technology. According to the study, both millennials (53%) and baby boomers (65%) prefer investment services where they can interact with a human advisor.
The study concludes that while robo-advisors have a significant role to play in investment, they can't-do it alone, and must, therefore, be accompanied by human advisors.
Apart from the human touch aspect, robo-advisors cannot provide highly customized and holistic financial planning.
As Steven Elwell, a partner at Level Financial Advisors notes, robo-advisors can help investors make some tailored decisions by their reported risk profile buy they cannot go into details.
Human advisors, on the other hand, can sit down with the investor and get into the nitty-gritty that makes investment meaningful.
Unlike computer algorithms, human advisors can take investors through the goal-setting process and offer guidance to their achievements.
For instance, if the investor intends to buy a home in the next ten years, a human financial advisor can help them identify the path to achieving this goal.
Robo-advisors on the other hand can only offer automated solutions to a risk profile based simply on a questionnaire.
This is not to mean that the robot-strategy which involves investing in low-cost ETFs, rebalancing and tax loss harvesting, is not good but may not work alone for some investors.
According to Andy Yadro of Googins Advisors, purely robotic advisors are best suited for investors with small investment portfolios or basic planning needs.
As Yandro notes, most retirees prefer an investment plan that preserves wealth while ensuring stable and consistent returns, a criterion that is best suited for a robo-advisor. However most also prefer a one to one interaction with a human advisor which gives them the psychological satisfaction of feeling that they are in control of their investment. A hybrid approach allows the investor the benefits that come with a robo-advisor and those that come with a human advisor.
In a recent interview with Wall Street Journal, Morgan Stanley CEO, James Gorman, notes that a purely robotic investment approach is nowhere near taking over the financial advising industry.
According to Gorman, most of his firm’s 3.5 million clients prefer to talk to a human financial advisor especially on complex investment topics such as estate planning and taxes. He indicates that his bank is still considering rolling out a robo-advisor later this year targeting investors with small and simpler portfolios.
It, therefore, goes without saying that in modern-day investing, a robo-advisor is a must-have tool for financial advisors who are looking to remain competitive.
Even when most investors might prefer a human touch in investment, they are also looking for the benefits that come with technology and are therefore likely to settle where both are available.
Financial advisors should, therefore, embrace robo-advisors as an opportunity to offer high-quality services to their clients.
